Farmland Partners Inc. (FPI) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto contained elsewhere in this Annual Report on Form 10-K.

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Overview and Background

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Our primary strategic objective is to be a leading institutional acquirer, owner and/or manager of high-quality farmland located in agricultural markets throughout North America. As of the date of this Annual Report on Form 10-K, we own farms with an aggregate of approximately 160,200 acres in Alabama, Arkansas, California, Colorado, Florida, Georgia, Illinois, Kansas, Louisiana, Michigan, Mississippi, Missouri, Nebraska, North Carolina, South Carolina, South Dakota and Virginia. In addition, we serve as property manager over approximately 26,300 acres (see “Note 4—Related Party Transactions”). As of the date of this Annual Report on Form 10-K, approximately 70% of our portfolio (by value) is used to grow primary crops, such as corn, soybeans, wheat, rice and cotton, and approximately 30% is used to produce specialty crops, such as almonds, citrus blueberries, and vegetables.  We believe our portfolio gives investors the economic benefit of increasing global food demand in the face of growing scarcity of high-quality farmland and will continue to reflect the approximate allocation of U.S. agricultural output between primary crops and animal protein (whose production relies principally on primary crops as feed), on one hand, and specialty crops, on the other.

In addition, under the FPI Loan Program, we make loans to third-party farmers (both tenant and non-tenant) to provide financing for property acquisitions, working capital requirements, operational farming activities, farming infrastructure projects and for other farming and agricultural real estate related projects.

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FPI was incorporated in Maryland on September 27, 2013, and is the sole member of the sole general partner of the Operating Partnership, which is a Delaware limited partnership that was formed on September 27, 2013. All of FPI’s assets are held by, and its operations are primarily conducted through, the Operating Partnership and its wholly owned subsidiaries. As of December 31, 2021, FPI owned 97.0% of the Common units and none of the Series A preferred units. See “Note 9 – Stockholders’ Equity and Non-controlling Interests” within the notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding the non-controlling interests.

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FPI has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with its short taxable year ended December 31, 2014.

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Recent Developments

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Rutledge Loans Refinancings

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On February 18, 2022, the Company and the Operating Partnership, as guarantors, and American Farmland Company L.P. (“AFCO”), a wholly owned subsidiary of the Company as the borrower, entered into an Amended, Restated and Consolidated Loan Agreement (the “Consolidated Loan Agreement”) with Rutledge Investment Company ("Rutledge"), pursuant to which the parties agreed to consolidate the Company's five outstanding promissory notes with Rutledge (the "Legacy Rutledge Loans") into a single revolving credit loan in an aggregate principal amount of up to $112.0 million (the "Consolidated Loan") maturing on March 1, 2027 (the "Maturity Date" and collectively, the “Refinancing”). As a condition to Rutledge providing the Refinancing, the Company and the Operating Partnership individually entered into Amended and Restated Guaranty Agreements with Rutledge, each dated as of February 18, 2022 (each, a “Guaranty Agreement”) whereby they are required to unconditionally guarantee AFCO's obligations under the Consolidated Loan, and AFCO entered into that certain Consolidated of Notes and Modification and Extension Agreement with Rutledge, dated as of February 18, 2022 (the “Modification Agreement,” and together with the Consolidated Loan Agreement and the Guaranty Agreements, the “Refinancing Agreements”). As of the date of this Annual Report on Form 10-K, the $112.0 million was fully drawn on the Consolidated Loan.

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The interest rate for the Consolidated Loan is based on the Secured Overnight Financing Rate, plus an applicable margin. The applicable margin for the Consolidated Loan will be 1.80% to 2.25%, depending on the applicable pricing level in effect. The Company previously paid a commitment fee to Rutledge equal to 0.50% of the aggregate principal

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amount of the Consolidated Loan. Generally, the Consolidated Loan Agreement contains terms consistent with the Legacy Rutledge Loans, including, among others, the representations and warranties, affirmative, negative and financial covenants and events of default. The Company will owe no prepayment penalty if it elects to repay the Consolidated Loan in full before the Maturity Date.

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The foregoing description of the Refinancing Agreements is not complete and is qualified in its entirety by reference to the text of the Refinancing Agreements, which are filed as Exhibits 10.26, 10.27, 10.28 and 10.29 to this Annual Report on Form 10-K and are incorporated herein by reference.

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2021 Completed Acquisitions and Dispositions

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During 2021, we completed 12 asset acquisitions, consisting of 12 properties, in the Corn Belt, Delta and South, High Plains, Southeast and West Coast regions. Aggregate consideration for these acquisitions totaled $81.2 million of which $28.4 million was paid through the issuance of notes payable. No intangible assets were acquired through these acquisitions. We also completed 12 dispositions consisting of 20 properties in the Corn Belt, Delta and South and Southeast regions. The Company received cash consideration for these dispositions totaling $70.6 million in cash consideration and $2.4 million of convertible notes receivable (which was subsequently converted to membership interests in the OZ Fund on July 16, 2021), and recognized an aggregate gain on sale of $9.3 million.

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Stock Repurchases

During 2021, we repurchased no shares of our common stock and 25,073 shares of our Series B Participating Preferred Stock for $0.7 million at an average price of $25.92 per share.

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Redemption of Series B Participating Preferred Stock

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On October 4, 2021, the Company converted all 5,806,797 shares of the outstanding Series B Participating Preferred Stock into shares of common stock. Each share of Series B Participating Preferred Stock was converted into 2.0871798 shares of common stock, or 12,119,829 shares of common stock in total, less any fractional shares.  Holders of the Series B Participating Preferred Stock received cash in lieu of fractional shares. As a result of the conversion, the Company recorded a $5.7 million deemed dividend to the Series B Participating Preferred stockholders, which represents the conversion value as of the conversion date less the carrying value as of October 4, 2021.

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Opportunity Zone Agreement

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On January 20, 2021, we entered into an agreement with Promised Land Opportunity Zone Farms I, LLC (the “OZ Fund”), a private investment fund focused on acquiring and improving farmland in qualified opportunity zones in the United States ("QOZs"), as designated under U.S. tax provisions enacted in 2017. On March 5, 2021, the Company sold 9 farms to the OZ Fund. On March 31, 2021, the Company sold an additional property to the OZ Fund. The Company received approximately $19.1 million in cash and approximately $2.4 million in convertible notes receivable (the “OZ Convertible Notes”). The OZ Convertible Notes had an interest rate of 1.35% and an aggregate principal balance of $2.4 million. On July 16, 2021, the Company provided notice to the OZ Fund that it was converting its OZ Convertible Notes, and accrued interest thereon, into membership interests in the OZ Fund, in accordance with the terms of the OZ Convertible Notes. The value of the conversion was $2.4 million and the Company’s membership interests in the OZ Fund was approximately 7.6% upon conversion and increased to 9.97% as of December 31, 2021 after subsequent capital contributions. Please refer to “Note 4 – Related Party Transactions.” The OZ Fund has the option to purchase additional properties from the Company.

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Impact of COVID-19 on Our Business

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We are gaining a better understanding of the impact of the COVID-19 pandemic on our business and the recovery relative to 2020. Gasoline consumption (and therefore ethanol, and its input product, corn) increased in 2021 over 2020, when consumption fell significantly because of the pandemic. Dining out (e.g., restaurants) increased in 2021 over 2020, when efforts to limit the spread of COVID-19 included stay-at-home orders that led to significant changes in U.S. consumers' food-spending patterns. We are unable to quantify the ultimate impact of the pandemic on our business, as

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there are still significant uncertainties around the social and economic impact of the pandemic, and government responses.  In such trying times, we are proud to support the industry and hardworking farmers that feed the entire country.

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Factors That May Influence Future Results of Operations and Farmland Values

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The principal factors affecting our operating results and the value of our farmland include global demand for food relative to the global supply of food, farmland fundamentals and economic conditions in the markets in which we own farmland and our ability to increase or maintain rental revenues while controlling expenses. We are currently in an environment of rapidly appreciating land values, driven by, among other things, inflation fears, strong commodity prices and a positive outlook for farmer profitability.  Moreover, each year additional farmland in various portions of the world, including the United States, is repurposed for commercial development, thus decreasing the land acreage available for production of permanent and specialty crops necessary to feed the world’s growing population.  Although farmland prices may show a decline from time to time, we believe that any reduction in U.S. farmland values overall is likely to be short-lived as global demand for food and agricultural commodities typically exceeds global supply and quality farmland becomes more scarce.

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Demand

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We expect that global demand for food, driven primarily by significant increases in the gross domestic product (“GDP”) per capita and global population, will continue to be the key driver of farmland values. We expect that global demand for most crops will continue to grow to keep pace with global population growth. We also believe that growth in global GDP per capita, particularly in developing nations, will contribute significantly to increasing demand for primary crops. As global GDP per capita increases, the composition of daily caloric intake is expected to shift away from the direct consumption of primary crops toward animal-based proteins, which is expected to result in increased demand for primary crops as feed for livestock. We anticipate these factors will lead to either higher crop prices and/or higher yields and, therefore, higher rental rates on our farmland, as well as sustained growth in farmland values over the long term.

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According to “How to Feed the World in 2050,” a report by the United Nations’ Food and Agriculture Organization (“UN FAO”), these factors are expected to require more than one billion additional tons of global annual grain production by 2050 to feed a global population in excess of 9 billion.  The projected growth in grain production represents a 43% increase from 2005-2007 levels and more than two times the 446 million tons of grain produced in the United States in 2014.  Furthermore, we believe that, as GDP per capita grows, a significant portion of additional household income is allocated to food and that once individuals increase consumption of, and spending on, higher quality food, they will strongly resist returning to their former dietary habits, resulting in greater inelasticity in the demand for food. As a result, we believe that, as global demand for food increases, rental rates on our farmland and the value of our farmland will increase over the long term. Global demand for corn and soybeans as inputs in the production of biofuels such as ethanol and soy diesel also could impact the prices of corn and soybeans, which, in the long term, could impact our rental revenues and our results of operations. The success of our long-term business strategy is not dependent on growth in demand for biofuels, and we do not believe that demand for corn and soybeans as inputs in the production of biofuels will materially impact our results of operations or the value of our farmland, primarily because we believe that growth in global population and GDP per capita will be more significant drivers of global demand for primary crops over the long term.

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Despite advances in income, according to “The State of Food Security and Nutrition in the World,” a report by the UN FAO, 2.37 billion people did not have access to adequate food in 2020.

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Supply

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Global supply of agricultural commodities is driven by two primary factors, the number of tillable acres available for crop production and the productivity of the acres being farmed. Although the amount of global cropland in use has gradually increased over time, growth has plateaued over the last 20 years. Typically additions to cropland are in areas of marginal productivity, while cropland loss, driven by urban development, tends to affect primarily highly productive areas. Cropland area continues to increase in developing countries, but after accounting for expected continuing cropland loss, the UN FAO projects only 173 million acres will be added from 2005-2007 to 2050, an approximate 5% increase. In comparison, world population is expected to grow over the same period to 9.1 billion, a nearly 40% increase. According

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to the World Bank Group arable land per capita has decreased by approximately 50% from 1961 to 2018. While we expect growth in the global supply of arable land, we also expect that landowners will only put that land into production if increases in commodity prices and the value of farmland cause landowners to benefit economically from using the land for farming rather than alternative uses. We also believe that decreases in the amount of arable land in the United States and globally as a result of increasing urbanization will partially offset the impact of additional supply of farmland. Additionally, we believe that farmland lost to urban development disproportionately impacts higher quality farmland. According to a study published in 2017 in the Proceedings of the National Academy of Sciences, urban expansion is expected to take place on cropland that is 1.77 times more productive than the global average. The global supply of food is also impacted by the productivity per acre of tillable land. Historically, productivity gains (measured by average crop yields) have been driven by advances in seed technology, farm equipment, irrigation techniques, and improvements in soil health, chemical nutrients and pest control. Furthermore, we expect the increasing shortage of water in many irrigated growing regions in the United States and other growing regions around the globe, often as a result of new water restrictions imposed by laws or regulations, to lead to decreased productivity growth on many acres and, in some cases, cause yields to decline on those acres.

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Conditions in Our Existing Markets

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Our portfolio spans numerous farmland markets and crop types, which provides us broad diversification across conditions in these markets. Across all regions, farmland acquisitions continue to be dominated by buyers who are existing farm owners and operators, whereas institutional investors constitute a small fraction of the industry. We generally see firm demand for high quality properties across all regions and crop types.

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Farmland values are typically very stable, often showing modest increases even in years of commodity price weakness. We expect this trend to continue, with modest but consistent annual increases that compound into significant appreciation in the long term.  Under certain market conditions, as we experienced in 2021, with strong commodity prices and farmer profitability, there are periods of accelerating appreciation in farmland values.  Leases being renegotiated under the robust market conditions experienced in 2021, the first leasing cycle since the farm economy improved, continue to reflect significant rent increases.

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We believe quality farmland in the United States has a near-zero vacancy rate as a result of the supply and demand fundamentals discussed above. We believe that due to the relatively high fixed costs associated with farming operations (including equipment, labor and knowledge), many farm operators in some circumstances will rent additional acres of farmland when it becomes available in order to allocate their fixed costs over additional acres. Our view is that rental rates for farmland are a function of farmland operators’ view of the long-term profitability of farmland, and that many farm operators will compete for farmland even during periods of decreased profitability due to the scarcity of farmland available to rent. Furthermore, because it is generally customary in the industry to provide the existing tenant with the opportunity to re-lease the land at the end of each lease term, we believe that many farm operators will rent additional land that becomes available in order to control the ability to farm that land in future periods. As a result, in our experience, many farm operators will aggressively pursue rental opportunities in their operable geographic area, even when the farmer anticipates lower current returns or short-term losses.

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In our primary row crop farmland, we realized rent increases of over 10% in connection with 2021 lease renewals, and, as the farm economy continues to be very strong, we expect to benefit from rent growth into 2022. This is consistent with robust prices in primary crop markets and tenant demand for leasing high quality farmland. Across specialty crops, operator profitability is recovering after being under pressure partly due to COVID-19.

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Lease Expirations

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Farm leases are generally three to five years in duration. As of December 31, 2021, our portfolio had the following lease expirations as a percentage of approximate acres leased and annual minimum fixed rents:

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Rental Revenues

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Our revenues are primarily generated from renting farmland to operators of farming businesses. Our leases have terms ranging from one to 40 years, with three years being the most common.  Although the majority of our leases do not provide the tenant with a contractual right to renew the lease upon its expiration, we believe it is customary to provide the existing tenant with the opportunity to renew the lease, subject to any increase in the rental rate that we may establish. If the tenant elects not to renew the lease at the end of the lease term, the land will be offered to a new tenant.  As discussed above, the vacancy rate for quality US farmland is near zero and there is often competition among tenants for quality farmland; accordingly, we do not believe that re-leasing farmland upon the expiration of existing leases is a significant risk for FPI.

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The leases for the majority of the row-crop properties in our portfolio provide that tenants must pay us at least 50% of their fixed rent in advance of each spring planting season.  As a result, we collect a significant portion of total annual rents in the first calendar quarter of each year.  We believe our use of leases pursuant to which at least 50% of the annual rent is payable in advance of each spring planting season mitigates the tenant credit risk associated with the variability of farming operations that could be adversely impacted by poor crop yields, weather conditions, mismanagement, undercapitalization or other factors affecting our tenants. Tenant credit risk is further mitigated by usually requiring that our tenants maintain crop insurance and by our claim on a portion of the related proceeds, if any, as well as by our security interest in the growing crop. Prior to acquiring farmland property, we take into consideration the competitiveness of the local farm-operator tenant environment in order to enhance our ability to quickly replace a tenant that is unwilling to renew a lease or is unable to pay a rent payment when it is due.  Many of our leases provide for the reimbursement by the tenant of the property’s real estate taxes that we pay in connection with the farms they rent from us.

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Expenses

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Substantially all of our farm leases are structured in such a way that we are responsible for major maintenance, certain insurance and taxes (which are sometimes reimbursed to us by our tenants), while our tenant is responsible for operating expenses, minor maintenance, water usage and all of the additional input costs related to farming operations on the property, such as seed, fertilizer, labor and fuel. We expect that substantially all of the leases for farmland we acquire in the future will contain features related to expenses payable by us, consistent with substantially all of our existing leases. As the owner of the land, we generally only bear costs related to major capital improvements permanently attached to the property, such as irrigation systems, drainage tile, grain storage facilities, permanent plantings or other physical structures customary for farms. In cases where capital expenditures are necessary, we typically seek to offset, over a period of multiple years, the costs of such capital expenditures by increasing rental rates. We also incur the costs associated with maintaining liability and casualty insurance.

We incur costs associated with running a public company, including, among others, costs associated with employing our personnel, compliance costs, and legal and accounting fees. We incur costs associated with due diligence and acquisitions, including, among others, travel expenses, and consulting fees. We also incur costs associated with managing our farmland. The management of our farmland, generally, is not labor or capital intensive because farmland generally has minimal physical structures that require routine inspection and maintenance, and our leases, generally, are structured to

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require the tenant to pay many of the operating costs associated with the property. Furthermore, we believe that our platform is scalable, and we do not expect the expenses associated with managing our portfolio of farmland to increase significantly as the number of farm properties we own increases over time.

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Crop Prices

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While many people assume that short-term crop prices have a great impact on farm values, we believe that long-term farmer profitability and revenue per acre, expressed as crop prices multiplied by crop yield, is a much more significant driver of farm value. Crop yields trends in corn and soybeans have been steadily increasing over the last thirty years, and the USDA projects improved yields for the 2021/2022 marketing year (September 2021 to August 2022) compared to the previous year.  Short-term crop price changes have had little effect historically on farmland values. They also have a limited impact on our rental revenue, as most of our leases provide for a fixed rental rate, a common approach in agricultural markets, especially with respect to row crops, for several reasons. This approach simplifies the administrative requirements for the landlord and the tenant significantly. This approach supports the tenants’ desire to maintain access to their leased farms, which are in short supply, a concept expanded upon below, by providing the landlord consistent rents. Crop price exposure is also limited because tenants also benefit from the fundamental revenue hedging that occurs when large crop yields mitigate the effect of lower crop prices. Similarly, lower crop yields have a tendency to trigger higher crop prices and help increase revenue even when confronted by lower crop yields. Such hedging effect also limits the impact of short-term crop price changes on revenues generated by leases with a variable rent component based on farm revenues. Further risk mitigation is available to tenants, and indirectly to us, via crop insurance and hedging programs implemented by tenants. Our TRS also takes advantage of these risk mitigation programs and strategies with respect to the properties it owns.

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Crop prices are affected by many factors that can differ on a yearly basis. Weather conditions and crop diseases can create a significant risk of price volatility.  Changes in government regulations and policy, fluctuations in global prosperity, fluctuations in foreign trade and export markets and eruptions of military conflicts or civil unrest also impact crop prices.

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In late 2020 and 2021 prices rebounded to or near prior highs, driven by increased demand expectations from China and modest adverse weather conditions around the world.

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Interest Rates

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We expect that future changes in interest rates will impact our overall operating performance by, among other things, affecting our borrowing costs and borrowing costs of our tenants. While we may seek to manage our exposure to future changes in rates through interest rate swap agreements or interest rate caps, portions of our overall outstanding debt will likely remain at floating rates. In addition, a sustained material increase in interest rates may cause farmland prices to decline if the rise in real interest rates (which is defined as nominal interest rates minus the inflation rate) is not accompanied by rises in the general levels of inflation. However, our business model anticipates that over time the value of our farmland will increase, as it has in the past, at a rate that is equal to or greater than the rate of inflation, which may in part offset the impact of rising interest rates on the value of our farmland, but there can be no guarantee that this appreciation will occur to the extent that we anticipate or at all.

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International Trade

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In corn, the 2020/2021 marketing year (September 2020 to August 2021) saw a 55% increase in exports, compared to the previous year.  In soybeans, the 2020/2021 marketing year (September 2020 to August 2021) saw a 35% increase in exports, compared to the previous year.

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Following the trade tensions between China and the U.S. that started developing in 2018, the two countries reached a "Phase 1" trade deal in late 2019. At this point, we believe that China and the U.S. will endeavor to largely comply with the Phase 1 trade deal, leading to increased purchases by China of many U.S. agricultural exports. While logistical disruptions introduced by the COVID-19 pandemic slowed China’s compliance with its Phase 1 commitments, U.S. agricultural exports to China reached record levels in 2021 and the USDA projects exports to be higher still in 2022.

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Critical Accounting Policies and Estimates

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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts may differ significantly from these estimates and assumptions. We have provided a summary of our significant accounting policies in the notes to the historical consolidated financial statements included elsewhere in this filing. We have set forth below those accounting policies that we believe require material subjective or complex judgments and have the most significant impact on our financial condition and results of operations. We evaluate our estimates, assumptions and judgments on an ongoing basis, based on information that is then available to us, our experience and various matters that we believe are reasonable and appropriate for consideration under the circumstances.

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Real Estate Acquisitions

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When we acquire farmland where substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets it is not considered a business. As such, we account for these types of acquisitions as asset acquisitions. We allocate the purchase price of properties that meet the definition of an asset acquisition to net tangible and identified intangible assets acquired based on their relative fair values using assumptions primarily based upon property-specific characteristics.

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In making estimates of relative fair values for purposes of allocating purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired or developed and existing comparable properties in our portfolio and other market data.  The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the relative fair value of the tangible and intangible assets/liabilities acquired.  The allocations of purchase price are sensitive due to a number of inputs and judgements made by management including market data and property specific characteristics such as soil types and water availability.

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Net tangible assets, historically, have consisted of land, drainage improvements, irrigation improvements, groundwater, permanent plantings (bushes, shrubs, vines, and perennial crops), and grain facilities, while intangible assets, historically, consisted of in-place leases, above market and below market leases, and tenant relationships.

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We allocate the purchase price to the fair value of the tangible assets by valuing the land as if it were unimproved. We value improvements, including permanent plantings and grain facilities, at replacement cost, adjusted for depreciation. Our estimates of land value are made using a comparable sales analysis. Factors considered by us in our analysis of land value include soil types and water availability and the sales prices of comparable farms. Our estimates of groundwater value are made using historical information obtained regarding the applicable aquifer.  Factors considered by us in our analysis of groundwater value are related to the location of the aquifer and whether or not the aquifer is a depletable resource or a replenishing resource.  If the aquifer is a replenishing resource, no value is allocated to the groundwater.  We include an estimate of property taxes in the purchase price allocation of acquisitions to account for the expected liability that was assumed.

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When above or below market leases are acquired, we value the intangible assets based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above market leases and the initial term plus the term of any below market fixed rate renewal options for below market leases that are considered bargain renewal options. The above market lease values will be amortized as a reduction of rental income over the remaining term of the respective leases. The fair value of acquired below market leases, included in deferred revenue on the accompanying consolidated balance sheets, is amortized as an increase to rental income

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on a straight-line basis over the remaining non-cancelable terms of the respective leases, plus the terms of any below market fixed rate renewal options that are considered bargain renewal options of the respective leases.

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The purchase price is allocated to in-place lease values and tenant relationships, if they are acquired, based on our evaluation of the specific characteristics of each tenant’s lease, availability of replacement tenants, probability of lease renewal, estimated down time, and our overall relationship with the tenant. The value of in-place lease intangibles and tenant relationships will be included as an intangible asset and will be amortized over the remaining lease term (including expected renewal periods of the respective leases for tenant relationships) as amortization expense. If a tenant terminates its lease prior to its stated expiration, any unamortized amounts relating to that lease, including (i) above and below market leases, (ii) in-place lease values, and (iii) tenant relationships, would be recorded to revenue or expense as appropriate.

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Impairment of Real Estate Assets

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We evaluate our tangible and identifiable intangible real estate assets for impairment indicators whenever events such as declines in a property’s operating performance, deteriorating market conditions, or environmental or legal concerns bring recoverability of the carrying value of one or more assets into question. If such events are present, we project the total undiscounted cash flows of the asset, including proceeds from disposition, and compare it to the net book value of the asset. If this evaluation indicates that the carrying value may not be recoverable, an impairment loss is recorded in earnings equal to the amount by which the carrying value exceeds the fair value of the asset. Assessing impairment can be complex and involves a high degree of subjectivity in determining if indicators are present and in estimating the future undiscounted cash flows or the fair value of an asset.  In particular, these estimates are sensitive to significant assumptions, including the estimation of future rental revenues, operating expenses, discount and capitalization rates and our intent and ability to hold the related asset, all of which could be affected by our expectations about future market or economic conditions.  Assumptions are primarily subject to property-specific characteristics, especially with respect to our intent and ability to hold the related asset. While these property-specific assumptions can have a significant impact on the undiscounted cash flows or estimated fair value of a particular asset, our evaluation of the reported carrying values of long-lived assets during the current year were not particularly sensitive to external or market assumptions. There have been no impairments recognized on real estate assets in the accompanying financial statements.

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Results of Operations

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This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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Comparison of the year ended December 31, 2021 to the year ended December 31, 2020

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NM = Not Meaningful

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Our rental income for 2021 was impacted by 12 acquisitions and 20 dispositions that took place in 2021. Although we have historically separately presented our rental income on a same-property portfolio basis to highlight the effect of changes in our rental income due to acquisitions and dispositions, we no longer believe this presentation is helpful to investors because the nature and significance of variable rents, specifically, yield, prices and timing of payment, vary (in some cases, materially) from year to year.  In addition, farms moving to or from direct operation are difficult to compare from year to year. Accordingly, beginning with this Annual Report on Form 10-K, we will no longer present information about this metric as part of the discussion of our results of operations.

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Rental income increased $1.6 million, or 3.6%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, resulting from increased variable rent, partially offset by asset dispositions, rental rates renegotiated downward in the summer of 2020 during the height of the COVID-19 pandemic and before the recovery in the farm economy, and certain farms converting to direct operations.

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Revenues recognized from tenant reimbursement of property taxes decreased $0.2 million, or 5.1%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.  This decrease is the result of asset dispositions and certain farms converting to direct operations.

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Crop sales decreased $1.0 million, or 53.7%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. This decrease is the result of a lower volume of crop sold as the Company directly operated fewer farms.

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Other revenue increased $0.7 million, or 48.1%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. This increase was primarily due to litigation settlement proceeds, management fees, and auction and brokerage income, partially offset by lower crop insurance proceeds.

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Depreciation, depletion and amortization decreased $0.3 million, or 4.3%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. This decrease is a result of asset dispositions and the decrease of the amortization of in-place leases acquired as part of the AFCO acquisition that were fully amortized in prior periods.

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Property operating expenses remained relatively flat at $7.3 million and $7.4 million for the years ended December 31, 2021 and 2020, respectively.

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Cost of goods sold totaled $1.5 million for the year ended December 31, 2021 compared to $3.4 million for the year ended December 31, 2020. This decrease is the result of a lower volume of crop sold as the Company directly operated fewer acres in the year ended December 31, 2021 compared to the year ended December 31, 2020.

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Acquisition and due diligence costs remained relatively flat at $0.1 million and $0.0 million for the years ended December 31, 2021 and 2020, respectively.

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General and administrative expenses increased $2.3 million, or 39.2%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. This increase was largely driven by higher personnel costs, travel and consulting expenses.

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Legal and accounting expenses increased $6.4 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, which was primarily the result of legal fees incurred in excess of insurance coverage in relation to a “short and distort” attack against the Company conducted by anonymous parties, including Quinton Mathews, under the pseudonym Rota Fortunae, and his co-conspirators, as discussed under Part I, Item 1 “Note 8—Commitments and Contingencies—Litigation”. This amount also reflects expenses related to the complaint filed against Sabrepoint, as discussed further below.

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On June 20, 2021, Quinton Mathews (a.k.a. “Rota Fortunae”) entered into a settlement agreement with the Company in which he agreed to pay the Company a multiple of the profits he made when the Company’s common stock price fell in connection with the Rota Fortunae article.  The Company has long believed the Rota Fortunae article was part of a short and distort attack on the Company.  This was confirmed when Quinton Mathews issued a press release admitting he and his advisory clients shorted the Company in advance of the article and profited from the decline it caused, and further admitted that many of the key statements in that article, which he acknowledged led to the stock’s decline, were false. Following the parties’ settlement, the Court granted a joint stipulated motion to dismiss the case on June 29, 2021.

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On July 2, 2021, the Company filed a complaint against First Sabrepoint Capital Management, LP, Sabrepoint Capital Partners, LP, Sabrepoint Capital Participation, LP, George Baxter, and Donald Marchiony (collectively, “Sabrepoint”) in the Civil District Courts of Dallas County, Texas seeking relief for their role, as alleged in the complaint, in the short and distort scheme. On December 17, 2021, the Company's claims against Sabrepoint were dismissed by the court.  We are pursuing an appeal of that order and are confident it will be overturned and the litigation will be allowed to proceed. On January 26, 2022, Sabrepoint filed a motion for attorney's fees relating to the defense of that action.  The Company has opposed Sabrepoint's attorney's fees application, which is currently pending before Judge Wysocki.

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The Company continues to defend stockholder class action lawsuits that the Company believes are meritless related to the claims made by Rota Fortunae. In 2021, the two prior lead plaintiffs of the stockholder class action withdrew and were substituted by a new lead plaintiff, who is now the third lead plaintiff purporting to represent the class in the litigation. Amounts incurred to defend the stockholder claims are no longer covered by the Company’s insurance policies because legal and other costs to defend such claims exceeded the Company’s coverage amounts. Accordingly, the Company has not recognized any receivable for insurance recoveries. During 2021, extensive discovery occurred in connection with the class action litigation, and the Company has filed a motion for summary judgment that, if granted, would end the litigation. Because discovery tends to be the most expensive portion of all litigation, we believe that legal fees should begin to

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decline, as was seen in the fourth quarter of 2021, when legal fees declined from an average of $2.3 million per quarter for the previous four quarters to approximately $1.3 million in the fourth quarter of 2021.

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Other operating expenses were negligible during the year ended December 31, 2021 and remained relatively consistent compared to the year ended December 31, 2020.

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Other income and expense changed to $0.1 million of income for the year ended December 31, 2021 from $0.1 million of expense for the year ended December 31, 2020.

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Gain on disposition of assets increased $6.3 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to the fact that the cumulative sales prices for the farms, in excess of book value, sold during the year ended December 31, 2021 were more than the farms sold during the year ended December 31, 2020.

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Interest expense decreased $1.7 million, or 9.9%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. This decrease is the result of a decrease in interest rates and lower outstanding debt throughout much of 2021.

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Liquidity and Capital Resources

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Overview

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Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay any outstanding borrowings, fund and maintain our assets and operations, make distributions to our stockholders and unitholders, and other general business needs.

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Our short- and long-term liquidity requirements consist primarily of funds necessary to make principal and interest payments on outstanding borrowings, make distributions on our Series A preferred units, make distributions necessary to qualify for taxation as a REIT, fund our operations, and pay legal fees in relation to the Rota Fortunae litigation in excess of the Company’s insurance coverage. In addition, we require liquidity to acquire additional farmland, extend loans under the FPI Loan Program, and make other investments and capital expenditures. We expect to meet our liquidity needs through cash on hand, operating cash flows, borrowings, equity issuances and asset dispositions, if necessary.

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We entered into equity distribution agreements on October 29, 2021 in connection with the "at-the-market" equity offering program (the "ATM Program"), under which the Company may issue and sell from time to time, through the sales agents, shares of our common stock having an aggregate gross sales price of up to $75 million (the "$75 million ATM Program"). In connection with our entry into the distribution agreements, we terminated the equity distribution agreements, each dated as of May 14, 2021, for our prior $50 million ATM Program (the "$50 million ATM Program”). Through December 31, 2021, the Company generated $25.7 million in gross proceeds and $25.4 million in net proceeds under the $50 million ATM Program, and $1.9 million in gross and net proceeds under the $75 million ATM Program for totals of $27.6 million and $27.3 million in gross and net proceeds, respectively. The ATM Program is intended to provide cost-effective financing alternatives in the capital markets. We intend to use the net proceeds for future farmland acquisitions in accordance with our investment strategy, for loans under the FPI Loan Program, and for general corporate purposes.  We intend to continue to utilize the ATM Program when the market price of our common stock remains at levels which are deemed appropriate by our Board of Directors. In addition, the Company may increase the size of the ATM Program in the future.

Our ability to incur additional debt will depend on a number of factors, including our degree of leverage, the value of our unencumbered assets, compliance with the covenants under our existing debt agreements, borrowing restrictions that may be imposed by lenders and the conditions of debt markets. Our ability to access the equity capital markets will depend on a number of factors as well, including general market conditions for REITs and market perceptions about us.

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We manage our capital position and liquidity needs by continuously forecasting our expected cash receipts, expenses and capital needs, managing our cash position and monitoring all the sources of capital available to us. Our business model, and the business model of real estate investment companies in general, utilizes a combination of debt and equity capital in

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financing the business. When debt becomes due, it is generally refinanced or repaid with proceeds from the issuance of equity securities or the sale of farms rather than repaid using our cash flow from operations. When material debt repayments are due within the following 12 months, we work with current and new lenders and other potential sources of capital sufficiently in advance of the debt maturity to ensure that all of our obligations are satisfied in a timely manner. We have a history of being able to refinance or extend our debt obligations to manage our debt maturities. We also have an effective shelf registration statement with approximately $200 million of capacity whereby we could issue additional equity or debt securities, and during 2021 we raised $27.3 million of equity capital from our ATM Programs as mentioned above. Furthermore, we have a large portfolio of high-quality real estate assets which we believe could be selectively and readily liquidated if necessary to fund our immediate liquidity needs. As of December 31, 2021, we had $112.0 million of indebtedness coming due on April 1, 2022. On February 18, 2022, we entered into an agreement with Farm Credit Mid-America to extend these maturities to March 1, 2027. After refinancing the $112.0 million of indebtedness mentioned above, the Company has no material debt maturities due before 2025. See "Recent Developments — Rutledge Loans Refinancing" for more information regarding the refinancing of our loans with Rutledge Investment Company on February 18, 2022.

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During the year ended December 31, 2021, we used $0.7 million to repurchase an aggregate of 25,073 shares of Series B Participating preferred stock at a weighted average price of $25.92. We currently have authority to repurchase up to an aggregate of $40.5 million in additional shares of our common stock or shares.

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Contractual Obligations

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The following table sets forth our contractual obligations and commitments as of December 31, 2021:

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Consolidated Indebtedness

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For further details relating to our consolidated indebtedness refer to “– Recent Developments – Financing Activity” and Note 7 – Mortgage Notes, Line of Credit and Bonds Payable included in the financial statement section of this Annual Report on Form 10-K.

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Sources and Uses of Cash

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The following table summarizes our cash flows for the years ended December 31, 2021 and 2020:

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Comparison of the year ended December 31, 2021 to the year ended December 31, 2020

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As of December 31, 2021, we had $30.2 million of cash and cash equivalents compared to $27.2 million at December 31, 2020.

Cash Flows from Operating Activities

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Net cash provided by operating activities decreased by $11.9 million, primarily as a result of the following:

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Cash Flows from Investing Activities

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Net cash provided by investing activities increased by $37.4 million primarily as a result of the following:

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Cash Flows from Financing Activities

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Net cash used in financing activities increased by $37.6 million primarily as a result of the following:

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Off-Balance Sheet Arrangements

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As of December 31, 2021, we did not have any off-balance sheet arrangements.

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Non-GAAP Financial Measures

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Funds from Operations (“FFO”) and Adjusted Funds from Operations (“AFFO”)

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We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or Nareit. Nareit defines FFO as net income (loss) (calculated in accordance with GAAP), excluding gains (or losses) from sales of depreciable operating property, plus real estate related depreciation, depletion and amortization (excluding amortization of deferred financing costs), and after adjustments for unconsolidated partnerships and joint ventures. FFO is a supplemental non-GAAP financial measure. Management presents FFO as a supplemental performance measure because it believes that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real estate related depreciation and amortization and gains and losses from sales of depreciable operating properties, which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs.

However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures necessary to maintain the operating performance of improvements on our properties, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other equity REITs may not calculate FFO in accordance with the Nareit definition as we do, and, accordingly, our FFO may not be comparable to such other REITs’ FFO. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or service indebtedness. FFO also should not be used as a supplement to or substitute for cash flow from operating activities computed in accordance with GAAP.

We do not, however, believe that FFO is the only measure of the sustainability of our operating performance.  Changes in GAAP accounting and reporting rules that were put in effect after the establishment of Nareit’s definition of FFO in 1999 result in the inclusion of a number of items in FFO that do not correlate with the sustainability of our operating performance.  Therefore, in addition to FFO, we present AFFO and AFFO per share, fully diluted, both of which are non-GAAP measures.  Management considers AFFO a useful supplemental performance metric for investors as it is more indicative of the Company’s operational performance than FFO.  AFFO is not intended to represent cash flow or liquidity for the period and is only intended to provide an additional measure of our operating performance.  Even AFFO, however, does not properly capture the timing of cash receipts, especially in connection with full-year rent payments under lease agreements entered into in connection with newly acquired farms.  Management considers AFFO per share, fully diluted to be a supplemental metric to GAAP earnings per share.  AFFO per share, fully diluted provides additional insight into how our operating performance could be allocated to potential shares outstanding at a specific point in time.  Management believes that AFFO is a widely recognized measure of the operations of REITs, and presenting AFFO will enable investors to assess our performance in comparison to other REITs.  However, other REITs may use different methodologies for calculating AFFO and AFFO per share, fully diluted, and, accordingly, our AFFO and AFFO per share, fully diluted may not always be comparable to AFFO and AFFO per share amounts calculated by other REITs.  AFFO and AFFO per share, fully diluted should not be considered as an alternative to net income (loss) or earnings per share (determined in accordance with GAAP) as an indication of financial performance or as a measure of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to make distributions.

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AFFO is calculated by adjusting FFO to exclude or include the income and expenses that we believe are not reflective of the sustainability of our ongoing operating performance, as further explained below:

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The following table sets forth a reconciliation of net income (loss) to FFO, AFFO and net income available to common stockholders per share to AFFO per share, fully diluted, the most directly comparable GAAP equivalents, respectively, for the periods indicated below (unaudited):

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The following table sets forth a reconciliation of AFFO share information to basic weighted average common shares outstanding, the most directly comparable GAAP equivalent, for the periods indicated below (unaudited):

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As of December 31, 2021 and 2020 we had 46,831,484 and 32,210,063 shares of common stock and Common units outstanding on a fully diluted basis, respectively.

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EBITDAre

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The Company calculates Earnings Before Interest Taxes Depreciation and Amortization for real estate (“EBITDAre”) in accordance with the standards established by NAREIT in its September 2017 White Paper. NAREIT defines EBITDAre as net income (calculated in accordance with GAAP) excluding interest expense, income tax, depreciation and amortization, gains or losses on disposition of depreciated property (including gains or losses on change of control), impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in value of depreciated property in the affiliate, and adjustments to reflect the entity’s pro rata share of EBITDAre of unconsolidated affiliates. EBITDAre is a key financial measure used to evaluate the Company’s operating performance but should not be construed as an alternative to operating income, cash flows from operating activities or net income, in each case as determined in accordance with GAAP.  The Company believes that EBITDAre is a useful performance measure commonly reported and will be widely used by analysts and investors in the Company’s industry. However, while EBITDAre is a performance measure widely used across the Company’s industry, the Company does not believe that it correctly captures the Company’s business operating performance because it includes non-cash expenses and recurring adjustments that are necessary to better understand the Company’s business operating performance.  Therefore, in addition to EBITDAre, management uses Adjusted EBITDAre, a non-GAAP measure.

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We further adjust EBITDAre for certain additional items such as stock-based compensation, indirect offering costs, real estate acquisition related audit fees and real estate related acquisition and due diligence costs (for a full discussion of these adjustments, see AFFO adjustments discussed above) that we consider necessary to understand our operating performance.  We believe that Adjusted EBITDAre provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income and EBITDAre, is beneficial to an investor’s understanding of our operating performance.

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EBITDAre and Adjusted EBITDAre have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

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Because of these limitations, EBITDAre and Adjusted EBITDAre should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results of operations and using EBITDAre and Adjusted EBITDAre only as a supplemental measure of our performance.

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The following table sets forth a reconciliation of our net income to our EBITDAre and Adjusted EBITDAre for the periods indicated below (unaudited):

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Inflation

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Most of our farming leases are two to three years for row crops and one to seven years for permanent crops, pursuant to which each tenant is responsible for substantially all of the operating expenses related to the property, including maintenance, water usage and insurance. As a result, we believe that the effect on us of inflationary increases in operating expenses may be offset in part by the operating expenses that are passed through to our tenants and by contractual rent increases because many of our leases will be renegotiated every one to five years.  We do not believe that inflation has had a material impact on our historical financial position or results of operations.

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Seasonality

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Because the leases for a many of the properties in our portfolio require significant payments in advance of the spring planting season, we receive a significant portion of our cash rental payments in the first calendar quarter of each year, although we recognize rental revenue from these leases on a pro rata basis over the non-cancellable term of the lease in accordance with GAAP.

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